All Forum Posts by: Mike Hartzog

That's a strange situation.  Most municipalities don't allow a single building to be built across multiple lots, at least not in my area.

@Edward B.

I agree.  It will happen.  I am the impatient sort though so from my perspective it cannot happen too soon.  :-)

IMO one of the biggest risks all note investors face is collateral value. Unlike RE buyers, we cannot inspect the collateral property. BPO valuations are frequently inaccurate and, even when they are accurate, they reflect FMV for properties in saleable condition.  I have never been positively surprised by interior condition of a property after gaining title in foreclosure and doing an inspection.  Because of this, we absolutely need to have a sizable cushion of margin between our buying price and what we think is the value of the property.  This issue is exacerbated now that many markets have recovered and we must now add market risk to the equation.

That said, I agree with Bob that there are too many people in the market overpaying for notes, driving up prices and making it difficult to buy notes at the right price.

I simply call the county and ask when the next tax deed sale is scheduled.  Then I make sure to pay it off prior to that.  

I should have mentioned that the remaining payments value should be calculated, rather than taking that data from the seller. I have found that sellers don't commonly provide remaining payments and when they do it is not always accurate. Use NPER to calculate remaining payments based on UPB (or total debt), rate, and P&I payment. Then use that value in your PV calculation as Dion illustrates to find the purchase price based on your desired yield.

I wrote a blog post on this several months back which covers how to implement the 4 key financial formulas in Excel (PV, NPER, RATE, and PMT).  There is a link to a spreadsheet in the blog which includes sample implimentations of each.

@Roland Thomas Regarding the local opportunities you are seeing, I suspect you are referring to owner finance paper.  If that's the case, I agree.  That business, buying owner finance paper at a discount, has been around for many years.  It requires some marketing to find and buy them on any kind of scale, similar to what RE wholesalers do to find and buy houses from distressed sellers.

@Dion DePaoli - I have to agree with your comments on the coming "wave".  I do think there will be a second wave as the big boys sell off unwanted low value or otherwise distressed collateral assets from their portfolios.  I think the discounts on these assets will be much better than 70 cents on the dollar that was originally paid for the simple reason that the fund managers can recover more capital more quickly and with less risk by selling them at a loss than they can by working them.  We see these in the market today, and the vast majority should be avoided.  I suspect we will see more as these large pool purchases are worked through and the remaining assets liquidated.

@Steve K.

Steve - if the 49K note were actually in first position, yes I most certainly would have done the deal.  Lien position is important because a foreclosure will wipe out liens which are junior to the lien being foreclosed.  So with the 49K loan in first position, my position is secure with 86K of equity (based on 135K value).  With the 49K loan in second position with a 196K 1st, there is zero equity and the loan would be uncollectable.  If I foreclosed on it, the property would still be encumbered by the 196K loan.

@Russell Brazil - Yes, there are number of "superlien" states where this is true, including FL.  Ad velorem tax liens are similar.  These scenarios are generally well known by note investors.  The intention of my post was to underline the subordination scenario when determining lien position in scenarios where there are multiple mortgages or deeds of trust.

Thanks all for your comments. 

@Don Konipol - It's a good idea.  I have never done it but I have been thinking about it for the higher cost assets we are looking at.  I assume you don't do this when there is an existing lenders title policy, correct?  Do you have a particular title company you use for this?

This quarter we are out in the market reviewing tapes, making offers, and generally working to add some additional NPNs to the portfolio.  I recently submitted a bid on a FL note with an original balance of 49K which was originated in 2007.  The current value of the collateral is in the 135K range.  My indicative bid was accepted to I ordered BPO and title report for the asset to do my final DD.  Looking at the title report I found that there was another lien in 2nd position for 196K.  Same lender, same borrower, and executed on the same day.  The recording date of the 196K loan was roughly 10 days after the recording date of the 49K loan.  Hmmm... 

It's pretty common to see a first lien originated with a particular LTV cap a smaller second lien originated at the same time with a higher rate. In this case, the 49K loan had a rate of 12.75%. I scrutinized the Mortgage document for the 49K loan and on page 2 I found the following text added to the document "THIS SECURITY INBSTRUMENT IS SUBORDINATE TO AN EXISTING FIRST LIEN(S) OF RECORD."

After seeing this I was pretty convinced that the intent of the lender was for the 49K loan to be a second position lien.  I sent the documents over to my attorney for review and he indicated, with no uncertainty, that I was looking at a 2nd lien.  He indicated that even though the state recognizes recording date for determining lien position (the common practice), subordination agreements are also recognized.  He told me in no uncertain terms that if this ended up in court with lien position in question, I would lose.

Decision made... its a no go.  While I was disappointed that the deal turned out the way it did, I am very happy not to have learned about this issue BEFORE making the purchase.   The seller, BTW, is reputable and was apparently not aware of the issue.  

I am curious if anyone else has run across this type of situation before.